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Types of Distribution Channels

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Types of Distribution

Channels

Consumer channels

Direct

Manufacturer-retailer-consumer

Manufacturer-wholesaler-retailer-consumer

Business-to-business channels

Direct

Manufacturer-industrial distributor-businesscustomer

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Channel Design Options

for a Consumer Product

MM 301 lecture 2 4

Producer

Consumer

Retailer

B

Producer

Consumer

Retailer

Wholesaler

C

Producer

Agents

Wholesaler

Retailer

Consumer

D

Consumer

A

Producer

E

Producer

Agents

Retailer

Consumer

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Channel options for

industrial goods and services

MM 301 lecture 2 5

Producer

Industrial Buyer

Wholesaler

B

Producer

Industrial Buyer

Agent

C

Producer

Agent

Wholesaler

Industrial Buyer

D

Industrial Buyer

A

Producer

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Dual Distribution Systems

Multiple channel usage

Example:

pharmaceutical industry sells to hospitals, clinics, andorganizational customers directly and to consumersindirectly through drug retailers

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HUB AND SPOKE DISTRIBUTION

STRATEGY

Walmart Stores

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HUB

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CHANNEL ALTERNATIVESConventional

Vertical marketing system

(VMS) (channel is managed as a

coordinated or programmed

system)MM 301 lecture 2 8

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Vertical Marketing SystemsVertical Marketing Systems (VMS) consists of

producers, wholesalers, and retailers acting as a

unified system - that seek to maximize profits forthe whole channel.

Here, one channel members owns the others, hascontracts with them or use so much power that

they all cooperate. Such systems occur to control channel behavior

and manage channel conflict.

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There are three major types of VMSs which hasdifferent means for setting up leadership and

power in the channel; Corporate VMS

Contractual VMS Wholesaler-sponsored voluntary chains

Retailer cooperatives

Franchise organizations

Administered VMS

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Types of Vertical Marketing Systems

Corporate

VMS

Wholesaler-sponsored

voluntary

chains

Retailercooperatives Franchiseorganizations

Contractual

VMS

Administered

VMS

Verticalmarketing

systems (VMS)

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Corporate VMS In a corporate VMS, production and distribution

stages are combined under single ownership, in orderto manage cooperation and conflict management e.g.AT&T markets its products through its own chain ofdistributors.

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Contractual VMSA contractual VMS consists of independent firms

at different levels of production and distribution

who join together through contracts to obtainmore economies or sales impact than each couldachieve alone.

There are three types of contractual VMSs;

wholesaler-sponsored voluntary chains; are contractualmarketing systems in which wholesalers organize

voluntary chains of independent retailers to help themcompete with large corporate chain organizations.

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retailer cooperatives; are contractual marketing systems inwhich retailers organize a new, jointly owned business tocarry on wholesaling and possibly production.

franchise organizations; are contractual marketingsystems in which a channel member, called a franchiser,links several stages in the production-distributionprocess. There are three forms of franchisees;

manufacturer-sponsored retailer franchise system e.g. Fordlicenses dealers to sell its cars. The dealers are independentbusinesspeople who agree to meet various conditions of salesand service.

manufacturer-sponsored wholesaler franchisee system e.g.Coca-Cola licenses bottlers (wholesalers) in varius markets who

buy Coca-Cola syrup concentrate and then carbonate, bottle andsell the finished product to retailers in local markets.

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service-firm-sponsored retailer franchise system in which aservice firm e.g. Hertz, Avis, McDonalds, Burger King,Holiday Inn, Ramada Inn licenses a system of retailers to

bring its service to consumers.

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Administered VMSA vertical marketing system that coordinates

production and distribution stages, not through

common ownership or contractual ties, butthrough the size and power of one of the partiese.g. Procter & Gamble, Kraft, Campbell Soup (orretailers like Wal-Mart, Toys `R` Us) are very

strong that they can command special displays,shelf space, promotions and prices form the otherparties.

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feature Channel Captain: a dominant and controlling member of

a marketing channel

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Horizontal Marketing Systems Horizontal marketing systems is a channelarrangement in which two or more companies atone level join together to follow a new marketingopportunity.

The major benefit is that companies combine theircapital, production capabilities, marketingresources and therefore accomplish more.

Companies might join forces with competitors ornoncompetitors. They might work with each otheron a temporary or permanent basis or they maycreate a separate company.

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E.g. Coca-Cola and Nestle formed a jointventure to market ready-to-drink coffee and tea

worldwide. Coke provided worldwide experincein marketing and distribution beverages andNestle contributed two established brandnames - Nescafe and Nestea.

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Innovations in Marketing Systems

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Horizontal MarketingSystem

Hybrid MarketingSystem

Two or more companiesat one channel level join

together to increasecoverage

Example:Banks inGrocery Stores

A single firm sets up twoor more marketing

channels to increasecoverage

Example:Retailers,Catalogs, and SalesForce

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Hybrid Marketing Systems Hybrid marketing systems is also calledmultichannel distribution systems where thecompany uses several marketing channels (e.g.

direct mail - telemarketing, retailers,distributors, dealers, own sales force) to sell itsproducts to different customer segments.

E.g. IBM uses its own sales force + IBM direct

which is the catalog and telemarketingoperation of IBM + independent IBM dealers +IBM dealers for business segments + largeretailers like Wal-Mart.

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The major benefit is that when the companyhas large and complex markets (consumers) the

company can expand its sales and marketcoverage by providing services to the specificneeds of diverse customer segments.

The disadvantage is that they are harder to

control and generate more conflict.

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Problems with an Independent

Channel The lack of channel coordination:

Each member has own private interests or profits inmind.

National vs. Local perspective Perspective is short-term profits.

Examples

Free-Riding McDonalds franchisees in a region. Manufacturer shirking on advertising and retailer on

retail service.

Retailer pricing is either too high or too low.

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Contracts Help Achieve

Coordination Types of Contracts:

Exclusive dealers - high end clothing.

Provides incentives to manufacturers to invest inadvertising and retailers to invest in service

Exclusive territories: - beer distributors, autodealerships

Prevents free-riding of retail services

Quantity Forcing: - Auto companies

Ensures that the right level of price and retail service isprovided.

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Table 13.1: Factors Influencing Marketing Channel structures

Characteristics of ShortChannels

Characteristics of LongChannels

Market

factors

Business users Consumers

Geographically

concentrated

Geographically diverse

Extensive technicalknowledge and regular

servicing required

Little technical knowledgeand regular servicing not

required

Large orders Small orders

Product

factors

Perishable Durable

Complex Standardized

Expensive Inexpensive

Continued on next slide . . .

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Characteristics of ShortChannels

Characteristics of LongChannels

Producer

factors

Manufacturer has adequate

resources to perform

channel functions

Manufacturer lacks

adequate resources to

perform channel functions

Broad product line Limited product lineChannel control important Channel control not

important

Competitive factors Manufacturing feels

satisfied with marketing

intermediaries performancein promoting products

Manufacturer feels

dissatisfied with marketing

intermediaries performancein promoting products

Table 13.1: Factors Influencing Marketing ChannelStructures (Continued)

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Market Geography Location, geographical size,& distance from producer

Market Size Number of customers in amarket

Market Density Number of buying units(consumers or industrial firms)per unit of land area

Market Behavior Who buys, & how, when, andwhere customers buy

Market Variables

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Product Variables

Bulk & Weight

Perishability

Unit ValueDegree of Standardization

Technical versus Nontechnical

Newness

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Company Variables

Size The range of options is

relative to a firms size

Financial The greater the capital, theCapacity lower the dependence on

intermediaries

Managerial Intermediaries are necessaryExpertise when managerial experience

is lacking

Objectives Marketing & objectives may& Strategies limit use of intermediaries

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Intermediary Variables

Availability Availability of intermediariesinfluences channel structure.

Cost Cost is always a consideration inchannel structure.

Services Services that intermediariesoffer are closely related to theselection of channel members.

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Environmental Variables

The impact of environmental forces isa common reason for making

channel design decisions.

Economic

Sociocultural

Competitive

Technological Legal

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Behavioral Variables

Develop congruent roles for channel members.

Attend to the influence of behavioral problemsthat can distort communications.

Be aware of available power bases.

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Channel Design

Decisions involving the development ofnew marketing channels either wherenone had previously existed or to the

modification of existing channels

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Channel Design

1. A decision made by the marketer

2. The creation or modification of channels3. The active allocation of distribution tasks in an

attempt to develop an efficient structure

4. The selection of channel members

5. A strategic tool for gaining a differential advantage

Distinguishing points of the definition include:

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Who Engages in Channel Design?

Producers,

manufacturers, service

providers, franchisors

Look down the

channel

toward the market

Look up the

channel

to secure

suppliers

Look both up anddown

the channel

Firms WholesalersRetailers

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Channel Design Paradigm

1. Recognize the need for

channel design decision

7. Select

channel members

5. Evaluate

relevant variables

6. Choose the best

channel structure

2. Set & coordinate

distribution objectives

3. Specify

distribution tasks

4. Develop alternative

channel structures

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Channel Design DecisionsDesigning a channel system include;

analyzing consumer service needs

setting the channel objectives and constraints identifying the major channel alternatives

evaluating the major alternatives

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Analyzing Consumer Service Needs Designing the distribution channel begins with

determining what (e.g. convenient location to buy theproducts, immediate delivery, credit, repairs, long-

term warranty) the consumers want from thechannel.

The company must balance the consumer serviceneeds with the feasibility and costs plus prices.

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Setting the Channel Objectives and

Constraints The company must decide which segments to

target and the best channels to use in eachsegment. Here, the objective of the company is to

minimize the total channel cost. Besides the target market, the companys channel

objectives are influenced by; the nature of its product, e.g. perishable products

require more direct marketing to avoid delays and toomuch handling.

company characteristics, e.g. the companys size andfinancial situation determine which functions it can

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handle, how many channels it can use, which transportationcan be used

characteristics of intermediaries, intermediaries differ in theirabilities to handle promotions, customer contact, storage andcredit e.g. the companys own sales force is more intense inselling.

competitors channel, some companies may prefer to competein or near the same outlets that carry competitors products,some may not e.g. Burger King wants to locate near McDonalds

environmental factors, economic conditions and legalconstraints affect channel design decisions e.g. in a depressedeconomy, producers want to distribute their goods in the mosteconomical way, using shorter channels.

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Identifying Major AlternativesAfter the channel objective have been determined,the company should identify its major channelalternatives in terms of (1) types of intermediaries,(2) number of intermediaries, and (3) theresponsibilities of each channel member.

Types of Intermediaries

A firm should identify the types of channelmembers that are available to carry out its channel

work.

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Number of Marketing Intermediaries

Companies must also determine the number of

channel members to use. There are threestrategies; intensive distribution; is a strategy in which companies

stock their products in as many outlets as possible.Convenience products and common raw materials must

be available where and when consumers want them e.g.toothpaste, candy Procter & Gamble, Coca-Coladistributes its products in this way. Here, the advantagesare maximum brand exposure and consumerconvenience.

exclusive distribution; is a strategy (opposite to intensivedistribution) in which the producer gives only a limitednumber of dealers the exclusive right to

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distribute its products in their territories. Often found innew automobiles and prestige womens clothing e.g.Rolls-Royce. Here, the advantages are establishing image

and getting higher markups. selective distribution; (is between intensive and exclusive

distribution) is a strategy in which the company usesmore than one but fewer than all of the intermediaries.Most television, furniture brands are distributed in this

way. Here, the advantages are; it provides good marketcoverage with more control and less cost than intensivedistribution + it does not spread its efforts over manyoutlets as in intensive distribution.

Responsibilities of Channel MembersThe producer and intermediaries must agree onprice policies, discounts, territories, and services

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to be performed by each party. E.g. McDonaldsprovides franchisees with promotional support,

training, management assistance, in turn,franchisees must meet company standards forphysical facilities, buy specific food products...

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Evaluating the Major AlternativesIn order to select the channel that satisfy thecompany objectives in the best way, eachalternative should be evaluated by using;

economic criteria; the company compares theprojected profits and costs of each channel.

control issues; the company prefers to keep thechannel where it has the highest control.

adaptive criteria; the company prefers to keep thechannel which is the most flexible to the changingmarketing environment.

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When to Make a ChannelDesign Decision

Developing a new product or

product line

Aiming an existing product at a

new market

Making a major change in some

other component of the

marketing mix

Establishing a new firm

Adapting to changing

intermediary policies that may

inhibit attainment of distribution

objectives

Dealing with changes inavailability of particular kinds of

intermediaries

Opening up new geographic

marketing areas Facing the occurrence of major

environmental changes

Meeting the challenge of conflict

or other behavioral problems Reviewing and evaluating